This Bounce Could Fizzle Fast

Once again, the DJIA did a very poor job of reflecting what was really going on in the market but there was better action after two days of intense selling in momentum stocks. IBM (IBM), Johnson & Johnson (JNJ), Caterpillar (CAT) and a few other low-beta, big-cap names pushed the indices higher, but there were some bounces in biotechnology and high-beta names like Facebook (FB), Amazon (AMZN) and Google (GOOG). We even had another surge in alternative fuel names such as Plug Power (PLUG), Ballard Power Systems (BLDP) and Quantum Fuel Systems Technologies Worldwide (QTWW).

The bounce action today wasn't very energetic and breadth on the Nasdaq was around even, but this is how most V-shaped bounces have started. The action never looks very impressive to start, but then it keeps running and sucks in underinvested bulls and squeezes the shorts.

The big difference this time is that leadership is in the low-beta, big-cap names. Either the momentum names need to come back to life or I think this bounce will fizzle out fast. We need quality leadership and this defensive stuff isn't going to do the job for long.

In the "old days" I might have considered being more aggressive on the short side, but in the current market shorts are too tough. There are underlying bids and downside momentum is not building. The market is still holding up, but it has flaws.

Have a good evening. I'll see you tomorrow.

Mar 25, 2014 | 1:51 PM EDT

The Action Is Misleading

Key leading names continue to show weakness.

The market is on its second bounce attempt of the day but it has been annoying action overall. We don't have enough downside momentum to justify shorting, and we haven't had enough bounce energy to make it worthwhile to load up on longs.

In addition, the major indices continue to misrepresent what is really going on. A few big-caps like IBM (IBM) and Intel (INTC) are driving the DJIA and S&P500 right now, but very poor action continues in most key leading names. And CNBC just had a blaring headline that the DJIA is at a two-week high. What they are missing is all the damage that has been done to the stocks that led this market for the past year or so.

In general, the market has done a good job of closing off the lows, which is always a positive. Friday was an exception, but we saw very few poor closes, which is key to sentiment. The conventional wisdom is that the smart money makes it move in the final hour of trading, so strong close bodes well for underlying support.

Plenty of bulls are still out there, quite confident that the market is going to regain its footing and be back at new highs in short order. One thing to keep in mind is that we are at the end of the quarter and there is likely to be window-dressing pressure to help hold things aloft. On the other hand, if there are any earnings warnings coming, they should hit soon.

I have plenty of cash to put to work but little interests me now. I'm very aware of how often this market quickly recovers from selling pressure and goes straight up, making it very hard to put money to work. But that doesn't change the fact that there are few interesting technical setups right now.

Mar 25, 2014 | 10:47 AM EDT

Don't End Up Chasing

Market players are moving slowly.

The action is broadly positive in the early going, with good bounces in key momentum names Facebook (FB), Tesla (TSLA) and Google (GOOG). But market players are moving slowly, hesitant to do too much chasing. Typically, these bounces have started slowly and on light volume, but it is obvious that many traders were stung by the poor action the last few days and are not rushing back in.

The dilemma for traders is that action like this has led to V-shaped bounces more often than not, and if you hesitate to start buying, you end up chasing. Anticipating a failed bounce has not worked well and it has produced a lot of underinvested bulls who end up providing support.

After the last couple of days, I'm down to about 15% long, so I have plenty of cash to put to work. But I see very little I'm interested in other than very short-term trades. I still like Quantum Fuel Systems Technologies Worldwide (QTWW), BioTelemetry (BEAT), Sky-mobi (MOBI), YOU On Demand (YOD) and Relypsa (RLYP), but I see no reason to add anything sizable now. I'm going to dig for new ideas.

The SPDR S&P 500 (SPY) has breached the lows of the day as I write, and it will be interesting to see if support kicks in. It is a bounce, but it isn't a very lively one.

Mar 25, 2014 | 8:25 AM EDT

This Pattern's More Difficult to Trust

But it's also tough to bet against the bulls.

What, me worry? --Alfred E. Neuman

The folks who have best navigated this market over the last few years have seldom worried about anything. Although the bears keep rolling out long lists of negatives, none of them have mattered for longer than a few days. As soon as the market struggles a little, it finds its footing and quickly shrugs off whatever had been bothering it.

The latest worry is the very poor action in high-momentum names. Biotechnology in particular has been pummeled, but the Investor's Business Daily list of top 50 stocks was also hit hard yesterday, losing 2.9%. These are the top momentum names in the market and the significant weakness there highlights how furious the rotation in this market has been.

Money has been pouring out of growth and momentum names and into value and defensive stocks. Even utilities, the ultimate safe haven, has been showing impressive relative strength lately.

The big question is whether this transition will provide the support for another leg up in the indices or is a sign of a change in market character and an indication that a top is forming?

Typically chaotic action of this sort is a sign of indecision and indicative of topping action. But as the skeptics have learned the hard way many times, the last few years this market always seems to find a way to recover just as the negatives are staring to build. When we are on the verge of a breakdown it is usually the time to buy.

What is different this time is that what is shifting is the market leadership. There seems to be recognition that many momentum names have become expensive and frothy and that they may not have the power to continue to run up. Biotechnology has suddenly become the poster boy for valuation issues and that has spread to other momentum names as well.

This market has consistently had good leadership as it has trended steadily higher. There has always been a group of high-growth, momentum names that have attracted aggressive investors. If they pulled back the dip buyers would waste no time snapping them up and putting them back on track.

For a couple weeks now leadership has been deteriorating. The bulls argue that it isn't an issue as financials have stepped up and we have stocks like Microsoft (MSFT), Wal-Mart (WMT) and Procter & Gamble (PG) taking the lead. The problem is that these stocks just aren't quality leadership. They typically will stay strong for a few days, but either new stocks come to life and lead us or the overall market struggles and eventually rolls over. When money is flowing into defensive names it is not a sign that an uptrend is going to gain momentum.

The action the last few days has shaken my out of quite a few positions and I'm holding a high level of cash. The bulls are ready for a bounce and we have some buying taking place in the early going. It is possible that we may shake off the recent negatives and regain our momentum, but it is tough to be too trusting when we have little quality leadership.

We are due for a bounce, but the bigger issue is whether we will have yet another V-shaped recovery. It is tough to bet against the bulls, but this pattern of action is becoming much more difficult to trust.

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